Will Second Wave of Tax Credits Carry Homebuilders Higher?

Cash for Clunkers got a second wave of funding due to popularity – will the housing sector’s favorite stimulus plan be extended?

According to a piece in yesterday’s New York Times, there is some debate among experts as to the success of the $8000 first-time homebuyers tax credit. While some experts say government dollars could be better spent elsewhere, others are begging for an extension and expansion of the program, which is currently set to expire on November 30.

The 1.1 million-member National Association of Realtors is, not surprisingly, among the groups lobbying for more tax credits, according to the Times. However, the initiative has support from outside the real estate industry as well. Republican Georgia senator Johnny Isakson is also pushing for an extended program, which would give a $15,000 tax credit to any homebuyer willing to stay in the property for at least two years.

The Times noted first-time homebuyers, as defined by the current plan, will account for as much as 40% of this year’s total homebuyers. Capturing the remaining 60% via an extended program open to all homebuyers would be great news for components of the Homebuilder Stocks Index.

All but one of the Index’s components have shot up by more than 20% after positive housing data started trickling in over the summer. Lennar (LEN) and Brookfield Homes (NSYE: BHS) have both more than doubled over the last three months, while Standard Pacific (SPF) and Beazer Homes USA (BZH) have tacked on more than 80% gains.

Meanwhile, the sector’s largest players, DR Horton (DHI), NVR (NVR), and Toll Brothers (TOL) have all appreciated by more than 25%.

Further incentives for home ownership could weigh on some components of the Residential REITs Index. AvalonBay (AVB), Essex Property Trust (ESS), and Equity Residential (EQR) could all see a drop in demand if a portion of potential renters decides to buy instead. According to the Times, Dean Baker of the Center for Economic Policy Research called the tax credits “a questionable redistributive policy,” and apartments are on the losing end.

As of this writing, the Homebuilder Stocks Index is one of the the top-100 performing tickerspy Indexes over the last month, up by 9.5%.

Tags: AVB, BHS, BZH, DHI, EQR, ESS, LEN, NVR, SPF, TOL